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Commercial and retail real estate lending standards have tightened significantly at major banks as lenders remain nervous about the broad economic environment, fall-off in market liquidity and downturn in residential housing markets across the U.S.

So says an annual Treasury Department survey released Thursday that looks at underwriting standards across the banking industry over the 12 months ending March 31. The survey covered 62 of the largest national banks, which together held loans totaling $3.7 trillion at the end of last year, or around 83% of all loans in the national banking system as of Dec. 31. Examiners looked at credit trends across the gamut of commercial and retail credit products, from residential first mortgages to commercial leasing to credit card lending.

After four consecutive years of “increasingly accommodative credit terms” the degeneration of financial markets in 2007 has led most banks to conclude that they’re less interested in risk and more interested in changing tack on loan standards and returning to “fundamental credit principles,” the survey’s authors at the Office of the Comptroller of the Currency wrote.

That account is in line with analyst warnings that banks face ongoing risk from exposure to bad loans. In a note to clients Friday Morgan Stanley analyst Betsy Graseck said she expects “cumulative loss forecasts to rise in residential mortgage related loans as housing values fall, in consumer loans as credit availability shrinks, and in commercial loans as consumer spending slows.”

Lenders have already begun to exercise some of the prudence in lending that the OCC sees continuing ahead – net tightening of underwriting practices for commercial residential construction, for example, rose to 62% of institutions in the year ending March 31 from 33% a year earlier and 11% in 2006. Only 2% of banks eased CRE lending standards in the most recent period, the agency said.

Fitch Ratings expects homebuilders will have to take more concessions at lenders in loan negotiations down the road. “Most of the public builders that Fitch tracks have negotiated new revolving credit agreements either late last year or so far in 2008,” the ratings agency wrote in a U.S. housing report last week. “Nevertheless, some builders may have to revisit their bank syndicates and request further covenant adjustments, especially relating to tangible net worth. During more recent negotiations banks have been lowering commitment amounts and charging higher fees.”

Banks are more vigilant when it comes to retail lending, too. Some 68% of retail lending institutions raised overall underwriting standards in the past year, up from 13% in 2007 and 7% in 2006 — a “major change from the past three surveys,” the OCC said. Residential real estate lending criteria tightened at 56% of banks this year. Additionally, high loan-to-value home equity loans, which typically exceed the value of a home, were harder to get at 89% of banks, compared with a 17% tightening a year earlier. The bar for conventional home equity underwriting was raised at 52% of institutions this year, up from 16% in 2007.

“Tightened credit standards should continue to largely offset improving affordability,” Fitch Ratings said of the current housing scenario. “The market for subprime loans is essentially non-existent, and within Alt-A, only a limited number of prime-like Alt-A loans are currently being originated,” the agency added.

Earlier last week Credit Suisse estimated 2008 residential mortgage originations at $1.65 trillion, the lowest level of activity since 2000.

Every bank surveyed by the OCC sees greater risk ahead in HLTV home-equity lending and more than two-thirds expect greater risk with conventional home equity loans. Some 60% of banks told the OCC they see more risk ahead in residential real estate lending.

Given the volume of housing loans outstanding, continued mortgage trouble ahead could sting banks. First lien and second lien mortgages account for about 40% of large-cap bank loan portfolios, Graseck said. As broad economic conditions deteriorate, and housing values continue to plummet, loan losses are accelerating, she said. Large-cap banks have so far taken only $48 billion of the total $229 billion in provisions Graseck expects from the fourth quarter of last year through the fourth quarter of next year.

On first look, the housing numbers released Wednesday appear calamitous. March housing starts dropped a whopping 11.9% to a 947,000 unit annual rate, the lowest level since March 1991. Building permits fell 5.8% to 927,000 units, the lowest level since April 1991. Both figures were well below economists’ expectations.

But a closer look at the details suggests this might be one of those occasions when less is better than more.

Tony Crescenzi, a strategist at Miller Tabak, characterized the housing starts figure as “excellent news.” Given the massive overhang of unsold homes in the market, it’s better for housing starts to be low, he said. Certainly, it is better for housing starts to be at 947,000 than at 2.292 million, which was the peak for the housing cycle in January 2006.

There’s also growing evidence that housing starts in recent months have finally moved below the level of household formation, Crescenzi argued, and this will “inevitably result in decreases in the inventory of unsold homes; that is, unless people are going to resort to living in caves again.”

Crescenzi estimated that today’s housing-starts figure represents only about 700,000 new dwellings, because as many as 300,000 of the starts represents reconstructed homes; tear-downs and such. But on the demand side, with the population growing by about 3 million per year, household formation is running at a pace of about 1.2 million per year. This means that the demand for new housing is running higher than the amount of new supply and will help bring down the level of unsold homes at a rate of 500,000 per year, he said.

Confidence among chief executives slipped again in the first quarter, according to The Conference Board. At 38, the measure is a point below last quarter’s measure and is now the lowest since the fourth quarter of 2000, when it was at 31, the research group said Monday.

A reading below 50 reflects more negative than positive responses.

Only 3% of the CEOs surveyed said economic conditions had improved, down from 7% in the last quarter. Only about one in four expected employment levels in their own industry to pick up, down from about 42% a year ago. Some 28% of CEOs saw employment in their field falling, down from 32% a year earlier.

But the longer-term future appears somewhat brighter to more executives than before. Some 19% saw better economic conditions in the next six months, up from 16% in the fourth-quarter survey. And some 23% said their own industries would improve in the next six months, up from 17% in the last quarter.

“CEOs’ assessment of current conditions suggests we’re still mired in a period of extremely slow growth, and while their short-term outlook moderately improved, they remain quite cautious,” Lynn Franco, Director of The Conference Board Consumer Research Center, said in a prepared statement.

The survey comes on the heels of a slew of negative economic data.

Global Insight said Friday it sees “very little momentum” for spending in the second quarter and that consumer sentiment readings suggest downside risks for consumer spending through the first half of the year. The March consumer price index is also unlikely to ease concerns about rising inflationary pressure, the research organization said.

Housing starts will likely to drop by as much as 10% in March figures due Wednesday, Global Insight said.

“Conditions in the housing market are as bad as they have ever been. Credit is tight, raw material costs are rising, inventories remain high, house prices are falling in more places—at an accelerated rate nationally—and the economy is losing jobs. We think that housing starts will drop another 20% before they hit bottom,” Global Insight said.

Home equity lines of credit will be the next chapter in the ongoing credit deterioration saga, and specialty finance and regional banks are going to bear the brunt of HELOC risk, Goldman Sachs said.

The warning came in a research note that was relatively upbeat on other financial sector stocks—analyst Richard Ramsden upgraded some brokers and asset managers and said fears about established names such as Lehman Brothers were exaggerated.

“Within mortgage, home equity is taking the lead as the biggest near-term problem,” he wrote Tuesday. Ramsden lowered estimates at most banks and downgraded mortgage bankers including Wells Fargo, Marshall & Isley and Zion Bancorp. He predicted median earnings-per-share growth for the sector in 2008 will dip 4% versus 2007.

Losses in the $1.1 trillion home equity market are entering uncharted territory, he said.

“We now forecast that the 2006 vintage of home equity will have 3.3% cumulative losses, and the 2007 vintage will have 11.1% losses … For the 2007 vintage, these loans will have credit card-like cumulative loss rates with mortgage-like yields – clearly a losing combination.”

Annual losses will rise to 1.75% in 2008 from 0.41% in 2007, 0.16% in 2006 and 0.1% in 2005, he estimated.

Only a very small percentage of HELOCs have been securitized, he pointed out, which leaves “a significant percentage of the risk on bank balance sheets.” Ramsden sees total home equity-related credit losses ahead of $52 billion.

HELOC delinquencies are already soaring—according to BMO Capital Markets analysts Peter Winter and Lana Chan, delinquencies increased 17% sequentially and 59.9% year-over-year at the last quarter. Citing American Bankers’ Association figures, Winter and Chan noted that delinquent consumer accounts in the fourth quarter reached a level—2.56%—not seen since 1992, when it was 2.68%.

“We believe that it is still too early to start buying bank stocks as we expect another shoe to drop on bank earnings from rising credit costs and further margin pressure,” they wrote in a note to clients Tuesday. “[L]oans that were poorly underwritten over the last few years do not all of a sudden become good loans just because the Fed is cutting rates,” they said.

Richard Bernstein at Merrill Lynch echoed that caution on banks and warned that apparently undervalued financial stocks are actually a value trap for investors looking to take advantage of a bottom.

“Our work seems to suggest that investors have considered only credit conditions and have largely ignored the coming slowdown in global growth,” he wrote in a research note Tuesday. HELOCs “are a bigger issue for small-and mid-cap bank stocks than are mortgages themselves,” he said.

It appears everyone in Washington has a plan to rescue the tens of thousands of “underwater” homeowners in America. What’s unfortunate, as a recent study by The Center for Economic and Policy Research pointed out, is that the proposals currently being circulated are likely to benefit banks more than homeowners.

Dean Baker, co-director of CEPR and author of the study, said that most recent bailout plans, including the one offered by the Office of Thrift Supervision (OTS), will provide little relief for most of the families at risk of losing their homes. Home prices have been falling at a 16% annual rate and will likely continue to fall at least in the near term. This means it’s highly unlikely homeowners will accumulate any equity throughout the duration of the plans.

“Under the OTS plan, falling house prices are particularly problematic, since a homeowner would need to accumulate enough equity to offset the bank’s loss on the initial mortgage before they can claim a dime for themselves,” Baker said. “Since most moderate-income homeowners only stay in their house for relatively short periods of time (the median is four years), most will accumulate no equity at all.”

The study also showed that while these plans may allow some homeowners to stay in their homes, monthly housing payments for those who are helped are likely to be close to 85% higher than if they rent a similar property. Under this logic, Baker argued that if low- and moderate-income homeowners ordinarily spend 30% of their income on shelter costs, the excess costs incurred under a plan like the OTS proposal would be the equivalent of an additional 26 percentage-point income tax.

Furthermore, while the homeowners “helped” will see little benefit, many of the mortgage bailout plans are likely to transfer billions of dollars, and possibly tens of billions of dollars, from taxpayers to mortgageholders, Baker said. Depending on the rate of foreclosure, taxpayers could plausibly end up paying as much as $75,000 for each homeowner who stays in their home — enough to pay for health care for a year for 20 children, the study claimed.

“The current housing crisis was allowed to develop because those in positions of responsibility somehow failed to see an $8 trillion housing bubble,” Baker wrote. “It would be unfortunate if the same people who were responsible for this massive failure were allowed to compound the economy’s problems with ill-conceived bailout plans that are ostensibly designed to help homeowners but really only benefit banks and other mortgage holders.”